What is a debenture? A plain-English guide for directors

What a debenture does

In UK lending, a debenture is usually a document in which a company gives a lender security over its assets. It’s registered at Companies House. Banks, invoice finance providers and specialist lenders commonly take one when lending to a business.

Fixed and floating charges

Fixed charges

A fixed charge attaches to specific assets, such as property, machinery, goodwill or intellectual property. The company can’t sell or dispose of those assets without the lender’s consent.

Floating charges

A floating charge covers assets that change in the ordinary course of business, such as stock and, sometimes, book debts. The company can deal with them freely until the charge “crystallises”, for example when the lender enforces. At that point it becomes fixed on whatever assets the company then holds.

What happens on default

If the company breaches the loan terms or can’t pay, a lender with a qualifying floating charge can usually appoint an administrator, without going to court. Lenders with fixed charges over property may appoint a receiver to collect rents or sell. Either way, control of the assets passes away from the directors.

Restrictions on the company

Debentures usually include promises (covenants) by the company, such as:

• not to give security to anyone else without consent
• not to sell key assets outside the ordinary course of business
• to keep assets insured and maintained
• to provide financial information regularly

Breaching these can be an event of default, even if the loan payments are up to date.

Where personal risk comes in

The debenture itself puts the company’s assets at risk, not yours. But lenders often also ask directors for a personal guarantee, and sometimes a charge over a director’s home. Those documents are where your personal assets come in, and they’re where independent legal advice is most often required.

Lenders may also ask directors who have lent money to the company to sign a deed of subordination.

Independent legal advice

ILA is sometimes required for a debenture, usually because it’s part of a package with personal guarantees. Your solicitor explains how the documents fit together, what the lender could do on default, and what that means for you personally. See ILA for a debenture.